Tanning firm spies on Web sites.

When Christa Cole became general counsel of California Tan Inc. three years ago, she had one main job: stop Web sites from selling the company's products.

A Los Angeles-based manufacturer of tanning lotions, the company tries to maintain an upscale image and price by selling exclusively through tanning salons, spas and major hotel resort chains.

But in a new twist on the perennial problem, California Tan has seen its brand damaged by a slew of discount Web retailers that sell at razor thin margins close to the wholesale price.

"The products are being what we call 'diverted' onto the Internet, which hurts sales and hurts our business," Cole said. "The indoor tanning salon owner will not want to carry our product if it's accessible and can be purchased anywhere."

In simpler times, companies would scour shops and flea markets in search of their merchandise that got distributed to the wrong channels. These days, they're scanning the Internet looking for their products on Web sites.

Selling discounted brand name products isn't necessarily illegal, though distributors may have broken their contracts with retailers by either intentionally or inadvertently supplying to discounters.

However, California Tan has been able to strike back by claiming the Web retailers infringed on its copyrights by displaying its trademarked images on their sites in order to sell products.

It has filed about a dozen copyright infringement lawsuits against Web sites selling the company's products, and sent out numerous cease-and-desist letters. That effort has stopped 64 Web sites from carrying its product lines and it currently is investigating 14 others.

While the Internet has allowed small and midsize retailers to expand far beyond their local borders, it also has provided an opening for a new breed of Web-based distributors who get their hands on brand-name products. These companies, often with a handful of employees and rented warehouse space, are able to ship directly to consumers all over the world.

"Now, you have people in China and Japan asking for this stuff. You're selling it overseas," said Anthony Miano, executive partner at S.G. Hart & Associates, a brand equity consulting company based in Ridgefield, Conn.

"The traditional diverters potentially only sold within a geographic area, say the Northeast," Miano said. "Now, you can buy something at a low price in Tallahassee and sell it at a high price in New York. You have access to a whole new market."

Tracking product

Part of the problem is the inability of manufacturers such as California Tan to ensure that their products end up in their desired retail channels because of the perennial issue of "diversion."

That term describes a "gray market" where a distributor who has an exclusive contract with the product manufacturer sells excess inventory to retailers that are not supposed to sell the products to consumers. Those retailers typically sell the products at discount prices.

"You know those cosmetic stores that have perfume and you don't know how they got them?" said Isla Metchek, executive director of the California Fashion Association. "A distributor sold it to them. They didn't get it directly from the perfume company."

("Gray market" goods are unlike counterfeit products, which are made by other companies to appear to be the actual products.)

California Tan, which sells products such as its 6.8 ounce Ambrosia Dark Frost tanning lotion for $50, or its 6 ounce Hempology Accelerator for $30, has seen its products go for as little as $12.50 on the Internet.

Cole said she monitors any number of Web sites, hiring law students for months at a time to punch names into Internet search engines and print out Web site images. It's a job made tougher because the company makes 20 to 30 new products each year.

Most of the time, she sends cease-and-desist letters to a Web site operator. If that doesn't work, she works with an outside lawyer to file a lawsuit. "As soon as you shut one down, another one pops up," she said. "It's similar to the flea market mentality."

Cole said that many times, the distributor is unaware the retailer is not authorized to sell the product.

"In a perfect world, the customer calls the distributor to buy the product and the distributor says, 'Okay, you're an indoor tanning salon,'" Cole said. "(But) I've seen it happen where the proof is a serial number or their business license, but the customer will make up that information."

A retailer can easily set up a Web site and generate computer images or copy and paste images from a manufacturer's Web site in order to appear to be an exclusive distributor.

On a mission

Product manufacturers have tried tracking their bottles with labels and cracking down on distributors to stop diversion. That hasn't worked, so California Tan decided to go one step further.

Cole was hired soon after a group of private equity investors brought in new management for the now 18-year-old company. What she found was that most of the Web sites selling California Tan products did not even bother to create their own pictures or words for the products.

"The Web site operators are going onto California Tan's Web site," Cole said. "They're either getting access to image archives or copying our copyrighted materials and putting it on their Web site."

That was a particular problem because the company spends a fair amount on its advertising campaigns, creating images that indoor tanning salons can use to sell products. But it also created a relatively successful legal strategy.

David Grace, an intellectual property partner at Loeb & Loeb LLP, said copyright claims that allege a Web site operator copied and pasted actual images from a company's Web site to sell its products are a new method of battling diversion in the courts.

In the past, part of the legal problem in asserting copyright claims was that retailers had the fight to "fair use" of that product if they purchased it legally for the purpose of re-selling it.

"What California Tan has done is come up with a strategy for attacking people who sell on the Internet, in part because they discovered these people copied photographs off the California Tan Web site," he said.

In March, a federal judge agreed with California Tan in its most recent case, against Body Source Ltd., operator of the Web site supplenet.com. The ruling argued that California Tan's labels, ingredients and images were copyrightable and that the "fair use" doctrine did not apply.

Larry Sagarin, owner of Body Source, admits at first he copied California Tan's images from its Web site but said he settled the case rather than appeal the ruling, because the costs of litigation exceeded the revenue he was generating through the company's line of tanning products.

"I believe that the consumer has the fight to seek out multiple vendors to find the products they desire," he said. "This is America. I understand what they're trying to do, but by the same token it's free enterprise and the consumer dictates the business."